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What A Creative Biotech VC Exit Looks Like In 2013

The lack of a strong IPO market makes life tougher for biotech venture capitalists. Boston’s Third Rock Ventures has done some creative deals to try to get a return. Details on one interesting one were revealed in the purchase of a company called Lotus Tissue Repair by Shire. Details were revealed in a recent 10-K:

Acquisition of Lotus Tissue Repair, Inc (“Lotus”)

On February 12, 2013 Shire completed the acquisition of 100% of the outstanding share capital of Lotus, a privately held biotechnology company based in Cambridge, MA. Cash consideration paid on closing by the Company was $49.3 million. Further contingent cash consideration of up to $275.0 million may be payable by the Company in future periods, dependent upon the achievement of certain safety and development milestones.

Lotus is developing a proprietary recombinant form of human collagen Type VII as the first and only intravenous protein replacement therapy currently being investigated for the treatment of Dystrophic Epidermolysis Bullosa (“DEB”). DEB is a devastating orphan disease for which there is no currently approved treatment option other than palliative care. The acquisition adds a late stage pre-clinical product for the treatment of DEB with global rights to Shire’s HGT pipeline. This acquisition is complementary to Shire’s existing investment in developing ABH001, which is currently being investigated as a dermal substitute therapy for the treatment of non-healing wounds in patients with EB.

The acquisition of Lotus will be accounted for as a purchase business combination. The assets acquired and the liabilities assumed from Lotus will be recorded at the date of acquisition, at their fair value. Shire’s consolidated financial statements will reflect these fair values at, and the results of Lotus will be included in Shire’s consolidated statement of income from, February 12, 2013. As the initial accounting for the business combination has not yet been completed, further disclosure relating to this acquisition will be included in the Company’s Form 10-Q for the three months ended March 31, 2013.

In the year to December 31, 2012 the Company expensed costs of $0.5 million relating to the Lotus acquisition, which have been recorded within Integration and acquisition costs in the Company’s consolidated statement of income.

According to a Third Rock spokesman, the company made a $26 million commitment to Lotus in 2011 and at the time of the sale was the sole investor with a 73% ownership stake. That means the firm already made a $10 million return. If the technology works, it could get future payouts totaling 20 times its initial investment. That’s a pretty good portrait of a lot of deals: an ok payout now to erase the downside, with the possibility of much more later.

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